Evaluating the Impact of Bank Mergers on Financial Stability in Bangladesh A Case Study of the Recent State-Owned Bank Consolidation

This study examines the financial stability implications of the 2025 merger of five Islamic banks in Bangladesh, undertaken as a state-led resolution measure in response to severe distress within the banking sector. The consolidation was driven by persistently high non-performing loans, capital inadequacy, liquidity pressures, and chronic governance failures that rendered the affected banks non-viable on a stand-alone basis. Using a qualitative, secondary-data–based methodology, the study analyzes regulatory, institutional, and governance dimensions of the merger to assess whether consolidation is likely to enhance or undermine financial stability. The analysis situates the merger within broader theories of bank consolidation, including efficiency gains, risk diversification, and “too-big-to-fail” concerns. It evaluates expected changes in organizational structure, internal control systems, and managerial responsibility within the newly combined state-owned bank. Particular attention is given to technology-enabled oversight, unified risk management frameworks, strengthened accountability mechanisms, and the redefinition of executive, middle-management, and branch-level roles. The study also highlights the critical importance of effective integration planning, as weaknesses in internal controls and governance during transition periods can elevate operational, compliance, and anti–money laundering risks. While consolidation offers potential benefits such as improved capital strength, centralized supervision, and enhanced governance the findings emphasize that these outcomes are highly conditional. Without robust regulatory oversight, strong internal controls, and credible accountability frameworks, the merger risks concentrating vulnerabilities and creating a systemically important institution prone to moral hazard. The study concludes that the merger represents both an opportunity and a risk for Bangladesh’s banking sector, with its ultimate impact on financial stability depending on the effectiveness of post-merger integration, governance reform, and supervisory enforcement.